New Rules of Personal Finance and Complete Fiscal Sanity

Hey, did you hear? The recession's over! Or it sort of, kind of, almost definitely is. The stock market's roaring back—we're going to get rich again! Or it isn't—and we're not! Best of all, we've finally started opening up our 401(k) reports again, and…we have no idea what to make of them. Yes, as the dust of total economic chaos clears, we're all searching for answers and signs of life, but financially speaking, things have rarely been more confusing. How do you figure out what the rising (or, okay, still falling) price of your house means? And what does that tell you to do with the rest of the savings you haven't yet started saving again? First step: Take a deep breath. Second step: Read on…

I’m going to miss the recession. Not the part about society being on the verge of collapse; that was terrible. And not the anxiety about my family’s future; that caused me to develop this tic where I compulsively rubbed my eyebrows with my fists until it looked like someone had gone at them with a tiny belt sander. (Not kidding.) What I’m going to miss is the feeling of being temporarily absolved of the need to do anything, a sense that the only option in an unhinged financial universe was to go full Bartleby: stop checking the balances, stop investing money, return to the relative innocence of my pre-fiscally aware self.

From the fall of 2008 until very recently— like about a week ago—my strategy was Shut it down. This is an example, I suppose, of what behavioral economists call emotional biases. Most of us are guided by our emotions when it comes to money, and so we overreact in both good times and bad. We inflate the bubbles and we deepen the busts; this is our way. Or certainly it’s mine. I am ruled by my monkey brain, as many of us have been of late.

The one article of faith that seems to have been shared by everyone in the aftermath of the collapse is that "the old rules no longer apply," though there’s been very little clarification about what the "new" rules might be. Maybe this is because the "old" rules—by which I mean the assumptions that framed our entire perception of wealth and acquisition over the past decade—were, as we now know, completely insane. For those who came of age, fiscally speaking, during the Greenspan era, it was something of a given that cheap money would always be available if you needed it. You could borrow at 5 percent, then invest that money and get back at least 10 percent, and in this way you would become wealthy like you and everyone around you deserved to be.

Well, now that we’ve wiped out a solid decade of accumulated wealth, the reeducation can be a buzzkill. It’s a little like explaining the need for legumes and leafy greens to a kid who’s been told his whole life that all he needs to do is walk over there to that chocolate waterfall a couple of times a day and stick his face underneath it. The rules we should be following are the ones that have been there all along, and they can basically be boiled down to this: Prepare for bad times; understand risk; stop being so greedy; realize that no one is responsible for your future but you.

They’re not very sexy, and they don’t guarantee that you’ll be rich, but if you follow them, you’ll be less anxious and more prepared for the future, and probably a little happier, too.—JOEL LOVELL

STEP 1.

Begin at the end: Make a will

It’s the colonoscopy of financial planning. You need one, and you’ll do anything to avoid doing it. "There’s a lot of intimidation out there, especially if you’re planning to do it yourself," says Denis Clifford, author of Quick Legal Will Book. "In the end, most people are surprised how uncomplicated the whole thing is." Here, Clifford helps you tackle the most procrastination-prone item on your fiscal to-do list.

Do it now, before it’s too late

"Nobody in their thirties is thinking about dying," Clifford says. "But if you don’t decide who’s to inherit your property, the state will do it for you."

Figure out what you’ve got and who gets what.

"Unless you’re a major player, you know what your assets are—a house, some stock, some security accounts." From there, figure out whom you want to pass everything along to. It’s true that second marriages and shared property add some layers of complexity, but as Clifford insists, "All a lawyer can say is: Try to work it out." After the tough decisions, all that’s left is the technical stuff.

Invest in a program that walks you through it

"I don’t recommend going to a bank and getting a one-page will form," says Clifford. If you want to give it a go on your own, he suggests picking up a program like Quicken’s WillMaker, which provides some color and context to the blanks you’ll be filling in.

Pick the people who will carry out your wishes

Besides choosing who will inherit your property, you need to name an additional— though equally essential—set of individuals: an ecutor to carry out the contents of the will; a guardian for any children under age 18; and lastly, at least two nonbeneficiaries to sign the witness provisions.

Consider revising from time to time

You might get divorced, you might have another child, you might come to despise your cousin Jimmy. Events in your life may change, but do your best to get your will right the first time. "A lot of books say you have to look at your will every year with an attorney," says Clifford. "Frankly, that’s baloney. Most folks draft one will and they’re set for the rest of their lives."—DANIEL RILEY

STEP 2.

Next, insure your life here on earth

Even if you already get free life insurance through your job, you should buy more. The point of insurance is to replace your salary in the event that you’re not around to earn it, and the general rule is that you should have a plan that covers up to ten years of income. Employer-based life insurance typically covers between one and five years of salary. That’s nice; it’s free. But it’s not enough.

So if you’re under 60, buy term insurance. What is term insurance, you ask, and how does it work? Like this: In exchange for a yearly premium, your insurer will cover you for a fid period of time (the term), which is usually twenty to thirty years. In the event of your demise, the insurer pays your dependents an agreed-upon sum (the policy), which is way more than you will ever shell out in premiums.

Say you’re a 40-year-old nonsmoking male and you want to buy a $500,000 policy. The first thing you should do is go to one of the many online brokers that let you compare rates for free. Consumer Reports recommends companies like Accuquote.com, LifeInsure.com, SelectQuote.com, or FindmyInsurance.com, because they’re easy enough for your grandma to navigate and they work with dozens of insurance companies, which means you’re guaranteed to get competitive rates.

At the time of publication, that 40-yearold nonsmoking male who wanted a $500,000 policy could buy a twenty-year level term—meaning the premium stays the same for the duration of the term—for as little as $360 a year, less than a dollar a day.

The bad news about term insurance is that by outliving the term, you’ll never get back the money you put in. Why throw your dollars away on premiums if you’re going to survive the policy’s term? Because paying for life insurance is not unlike "throwing money away" for car or health insurance that you hope you’ll never have to use. What you’re paying for is peace of mind—protection against the worst so that you don’t have to think about the worst.—SARAH GOLDSTEIN

STEP 3.

Destroy Debt

Remember how funny it was when your dog got a Visa-card offer in the mail? Well, the credit card industry wants him to pay off his debt. And since he’s not able to, they’re going to find a way to stick it to everyone else who holds a card. Since 2008, credit card lenders have had to write off billions in uncollectible debts, and as a result they’ve gone draconian on our asses, socking us with annual fees, slashing rewards and credit limits, and hiking interest rates as high as 30 percent, even as the prime rate hovers at a fifty-five-year low. Public outcry finally led Congress to pass the Credit CARD Act of 2009, which has done something to protect consumers (and may affect the terms of the offers below), but the industry is busily inventing some, uh, priceless new ways to take advantage of you—like charging you fees for not using your card.

Before you do anything else investmentwise, you need to pay off your balance or, if that’s impossible, at least transfer it to a card with an introductory zero percent APR. Otherwise, the interest you’re paying—14 percent on average—makes it basically impossible to come out ahead with any other investments you may have. It’s possible to play the game to your advantage, though, if you have the right information. The first and most important thing you need is an estimate of your FICO score, which you can easily get by using the online tools at CreditCards.com. (Excellent credit equals a FICO score of 750 or more; good credit equals 700 to 749. If your credit’s less than good, call the issuer to find out your chances of being approved and what APR they’d likely offer you. Don’t apply for a bunch of cards at once; your FICO score will take a hit.) Once you find out your score, identify the card category that best suits your needs—balancetransfer, low-APR, rewards, etc.—and put it to work for you.

Best balance transfer card

Excellent good credit:

Citi Platinum Select MasterCard

These days, no-fee balance transfers are rarer than Nancy Pelosi Web shrines. Citi’s Platinum Select MasterCard offers the next-best thing—an introductory zero percent APR lasting up to twelve months. Move a $5,000 debt to this card from an 18 percent APR card, pay everything off in a year, and you’ll save around $750. Or pay $100 monthly over the same period and reduce your balance to $3,800, a savings of almost $900.

Best cashback card

Excellent good credit:

Fidelity Retirement Rewards American Express

This card accrues 2 percent cash rewards, which you can direct not only to a retirement account but also to a traditional IRA, Roth IRA, 529 college-savings plan, and so forth. You’ll want to pay off your balance in full each month. "If you don’t," says Bill Hardekopf of LowCards.com, "rewards are a moot point. You’re eating them up."

Best low-APR card

Excellent credit:

First Tennessee’s Platinum Premier Visa, Visa Classic, and MasterCard

Good credit:

Capital One Platinum MasterCard

Most credit card rates are variable now, based on prime plus a profit margin of anything from 4 percent to a Sopranoesque 30 percent or more. The better your FICO score, the lower your qualifying APR; this is why many cards advertise a range of interest rates. At 5.15 percent, First Tennessee’s may be the lowest-APR cards available nationwide, but if you don’t meet the stringent credit requirements, the Platinum MasterCard may be a good choice. No matter what your credit rating, your best bet may actually be your local credit union, which likely charges an interest rate significantly lower than the banks’.

Best air-miles card

Excellent credit:

United Mileage Plus Select Visa

The battle for air-miles supremacy actually got more competitive during the recession, as card issuers tarted themselves up in hopes of attracting the smaller number of creditworthies still flying. This Visa racks up serious miles even if you fly only occasionally. —NATE PENN

If you read nothing else about money, read these:

There has been no shortage of books to explain our recent recession, but to understand what the hell we all just lived through and how the fallout is going to affect us for a loooong time to come, read Barry Ritholtz’s Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. Ritholtz is a scarily smart and righteously angry financial insider, and this book, which rips Wall Street a new one, is gripping and completely comprehensible even if you’ve never bought a stock in your life. Follow that up with John Lanchester’s I.O.U.: Why Everyone Owes Everyone and No One Can Pay, a funny, literary, crystalline dissection of the world of finance.

There are millions of personal-finance Web sites, but if you’re going to read just one, make it Get Rich Slowly(www.getrichslowly.org). It’s a great source for clear, specific advice on all matters from getting a mortgage to making peace with your financial vices.

And for managing your own accounts, put everything in one place at Mint.com. You click on one page and it’s all laid out clearly in front of you, every checking and savings and credit card and investment account, and the money elves at Mint e-mail you periodically to remind you when payments are due and to give tips on how to save cash that would never otherwise occur to you.

STEP 4.

Prepare for the worst (and hope for the best)

The next thing you need to do is make sure you have some savings in case things in your life go south, moneywise. How much money you need to put away, of course, depends on all sorts of individual decisions, but our advice is that you should have six months’ worth of basic expenses in a savings account that you can access whenever you want without getting penalized. The problem with savings accounts is that the returns are very, very low, and in the long run they’ll barely keep pace with, or will be outrun by, inflation. So you don’t want to park a ton of money here, just enough to cover you in hard times. Generally speaking, online banks offer the best interest rates on savings accounts. The easiest way to compare returns is to go to Bankrate.com. Check out Ally Bank and Bank of Internet USA (we know, everything about that sounds wrong, but it’s legit, really) and Capital One Direct, all of which, at the time of this writing, were offering returns between 1.4 and 1.7 percent.

STEP 5.

Retirement

No panic, no fear, know more than you used to

The first thing you need to do if you have a retirement account is cut the wires that lead to the panic button. Is it safe to get back in the stock market? We have no idea. But history says you shouldn’t care. Whatever the market is doing at any given moment is not your concern. You are not a day trader. What you are is a person who is in it for the long haul. You have time on your side, which means the heart-crushing drops like the one we just lived through are going to be offset by heart-pounding rises. The average annual rate of return from the SP 500 over any twenty-year period since 1927 is 7 percent. So twenty years from now, if history continues to repeat itself, you will have gotten $7 a year for every $100 you put in. It’s not risk-free, as recent carnage all too vividly attests, but if you want to take a relatively hands-off approach to retirement planning, it remains the best game in town. If you haven’t given any thought to how you’ll survive when you retire, we beseech you: Please begin regularly putting money into a retirement account right now. We can’t emphasize enough how important this is. Really, if you have any regard for your future self, you will heed this advice and take part in one of the following plans.

Save through your employer

If you have a full-time job, chances are your employer has set up a 401(k) plan—or a 403(b) if you work for a nonprofit. If so, again, start putting money into it now. If you’re one of the lucky few whose employers match their contributions dollar for dollar or fifty cents on the dollar, for the love of all that is good, please, please, take advantage of that. You are getting an astounding rate of return if your company matches your contributions. To not take advantage of it is to hate free money.

Set up a retirement account on your own

If the employer plan isn’t an option (or even if it is and you just want another, or a different, retirement account), then set up an IRA (individual retirement account). There are basically two main flavors to choose from. The first is the traditional IRA. As with the 401(k), the money you put in here is tax-deferred, which means you don’t pay any tas on it now, but you do years from now when you take it out. The other option is the Roth IRA , which is set up in reverse: You pay tas on the money you contribute now, but not when you take it out. Which one should you choose? There are various factors, the main one having to do with your tax bracket now versus what you think your tax bracket will be in the future. (To figure out how your money will fare in each account, check out Morningstar’s IRA Calculator.) Whatever you do, don’t let the work of deciding between the two hold you up. Just do it. (If you’re young, conventional wisdom says go with the Roth.) What’s important here is that you’re taking advantage of time and putting money into your account as soon as possible.

Okay, you’ve set up your account, and now you have to "allocate" your funds, and you’re like, "Asset allocation? What does that mean? Zzzzzzz." All allocation means is dividing your contributions over various "asset classes": stocks, bonds, and cash, generally speaking. The most volatile asset class is stocks (also called equities or securities), with bonds being less volatile (when you buy a bond, you’re essentially loaning money to the government or a company in exchange for a fid return for a set amount of time) and cash (Treasury bills, for instance) being the safest. And there are options within each asset class with varying levels of volatility. (Think penny stocks versus the stocks of blue-chip companies.) In general, the more volatile the investment, the higher your potential return will be (and also the higher potential for loss). The idea is that you diversify among the asset classes, putting more money into the riskier classes early on and then gradually shifting your money to less volatile investments as your retirement date approaches. It’s a great plan, and should work, so long as you shift your investments into safer harbors before the once-in-ageneration cataclysm comes along.

So how do you figure out the allocation strategy that’s right for you? A good place to start is with the asset-allocation calculator at Yahoo! Finance or IPERS.org. You enter various factors like your current age, expected year of retirement, and tolerance for risk, and the calculator creates a nicelooking pie chart with the assets you should be investing in and in what proportion. The next step is to buy the right stuff in the right proportions. The stocks that you purchase will be in "actively managed" funds or index funds (you’ll want to put your money in index funds; more on this in Step 6), as will the bonds, and all you need to do now is automate things so that a set amount of money gets transmitted each month to your retirement account. You want to invest consistently and unemotionally, which means taking yourself out of the process as much as possible.

Even though you have your savings running on autopilot, you still need to check your portfolio regularly (at least once a year) to make sure your investments are distributed the way you want them to be. (Over time, as some investments do well or others struggle, the original allocations start to get out of whack.) Once a year, that’s all we’re saying. Every six months, preferably. You can do that, right? And that’s it. Your future self will be significantly less anxious and regretful. Did we mention you should do this now?—MICHAEL HSU

STEP 6.

Invest the rest

You could buy individual stocks, but that’s a terrible idea. You could also invest in a mutual fund, where your money is pooled with other people’s money and managed by a fund manager who chooses your investments for you. But you pay fees to the fund manager according to the fund’s expense ratio, which will cost you a portion of your investment even if the fund loses money.

So put your money in an index fund, where the fund manager is not a person but a computer that aligns the fund’s holdings as needed. Automate it as you did with your retirement account, and pay attention to rebalancing every six months. Once you get a feel for things and have a little more money to invest, you should ideally be spreading your investments over a mix of indes, putting some money in an SP 500 index, say, and some in a tech index, and some in an overseas fund. The average mutual fund does no better than index funds that track the SP 500. You don’t need a Wharton MBA to figure out which is the better value.

And lastly, a word about homes

The past decade has been nothing like the rest of American history when it comes to homeowning. And if the coming decade is anything like the last one—well, our nation will eventually be so broke that it’ll be hard to buy milk, let alone property. The safer bet is to assume that, going forward, real estate will work a lot more like it did pre-Greenspan. Interest rates are going to go up, and once the government pulls back efforts to help the housing market later this spring, it’s going to get more expensive to borrow than it is right now. That means you need to forget everything you learned watching Flip That House and start thinking like your parents, or even grandparents, did when it comes to real estate: that a home is only a good investment if you plan to spend a lot of your life in it.

If you’re looking to buy

First, make sure that buying is a smart move for you. Thirty-year fid mortgages made a lot of sense when Americans tended to stay put for their entire careers but may make less sense now if you’re likely to change jobs or cities every few years. Start by using a good rent-buy calculator, like the one at NYTimes.com. (Assuming the housing market returns to its historical norms, 3 to 4 percent is a reasonable, perhaps even optimistic, guess for an appreciation rate.) Then, if buying is the right call, don’t feel rushed into doing so by the low interest rates and $8,000 homebuyers’ tax credit. While it’s impossible to predict precisely what the housing market will do, chances are that when the government suspends these interventions, prices will fall further.

If you own (but bought more than a decade ago)

So long as you haven’t been taking bubble-years’ equity out of your (then value-inflated) home, you’re fine. The only thing to consider is lowering your monthly payments. If you haven’t refinanced yet, do so soon, before rates climb. If you’re saving a point or more on interest, it’s worth the refinancing fees. But it may take some persistence; banks are currently overwhelmed with requests and can be reluctant to refinance for borrowers who aren’t in danger of default.

If you own (but bought during the bubble)

Even if you weren’t intending to make a quick buck when you bought your home, you need to look at your situation in the same way many other bubble-years buyers did: as an investment. Which means that while you may be able to make the payments on your mortgage, you might not want to—especially if you now owe way more than your home is actually worth. If your home hasn’t depreciated badly, talk to your bank about a refinance to keep your monthly costs low. If it has depreciated badly, it may make sense to discuss a short sale with your bank or to consider what’s known as a "strategic default." Walking away from a mortgage is a complicated process (go see a lawyer) and will have negative credit implications, but—with this recession having already brought bailouts to just about every sector of the economy— the moral stigma of default is now largely gone.—MARK KIRBY

&#x95;The first and most important thing you need is an estimate of your FICO score, which you can easily get by using the online tools at CreditCards.com. (Excellent credit equals a FICO score of 750 or more; good credit equals 700 to 749.)

&#x95;You’ll want to pay off your balance in full each month. "If you don’t," says Bill Hardekopf of LowCards.com, "rewards are a moot point. You’re eating them up."

&#x95;There are millions of personal-finance Web sites, but if you’re going to read just one, make it Get Rich Slowly (www.getrichslowly.org). It’s a great source for clear, specific advice on all matters from getting a mortgage to making peace with your financial vices.

&#x95;And for managing your own accounts, put everything in one place at Mint.com.

&#x95;A good place to start is with the asset-allocation calculator at Yahoo! Finance or IPERS.org.

&#x95;Thirty-year fid mortgages made a lot of sense when Americans tended to stay put for their entire careers but may make less sense now if you’re likely to change jobs or cities every few years. Start by using a good rent-buy calculator, like the one at NYTimes.com.

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